The AIM companies unexpectedly benefiting from Covid-19

by Andrew Hore from interactive investor |

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Pharmaceutical companies will obviously benefit from the pandemic, but many other sectors will too. 

Pharmaceutical companies with Covid-19 tests and potential treatments have been some of the best AIM performers over the past six months.

That is no surprise, but there are also other companies that may not have been immediate beneficiaries of coronavirus and the related lockdown but that could still see a longer-term boost for their businesses.

Video games companies, such as Frontier Developments (LSE: FDEV) or Team17 (LSE: TM17), have certainly received a short-term boost from greater demand during lockdown. There are other companies that may not see the full benefits this year, but their longer-term growth may be brought forward or accelerated.

For example, Dave Whelan of Ireland-based VR Education (LSE: VRE) believes the interest from potential customers for virtual reality-based education and events this year might have taken three to five years to build up under normal conditions.

The development of the ENGAGE virtual reality platform has been well-timed. It was launched at the end of 2019. Education was the initial focus of the platform, but corporate communications and events were always meant to be a longer-term source of business. Events has become a major source of income in a short time. Education and training use is also growing.

These events and training sessions are inexpensive compared to real-life events, but conversations can take place in networked areas. That is likely to mean that the VR platform will continue to be used instead of many real-life events.

Management sped up the development of the android version of VR Education’s technology and this means that it is no longer held back by a lack of virtual-reality headsets.

The ENGAGE platform was used to produce the HTC Vive Ecosystem conference and HTC Corporation was impressed enough to invest €3 million (£2.77 million) in VR Education.

The Taiwan-based consumer electronics company will also distribute ENGAGE around the world. HTC is particularly strong in China, the rest of Asia and Europe. The launch in China is expected before the end of the year. ENGAGE has already built up revenues in the US.

Building up capacity to meet demand is the main problem that VR Education has.

It has been recruiting, and not just in Ireland. The current move towards remote working means that VR Education has been hiring in the UK and the US.

Even so, it is currently running near to its capacity, and more people will have to be taken on.

VR Education is still losing money. The current rate of cash burn is €200,000 a month, and there was €2.9 million in the bank in early September. Costs have increased because of the recruitment, but higher revenues will follow this investment.

Covid-19 has been a double-edged sword for virtual-reality content producer MelodyVR (LSE: MVR), due to the cancellation of the music concerts it would normally rely on. However, the move to virtual events without crowds has provided additional opportunities to show what it can do.

MelodyVR’s technology enables fans to view an event in 360degrees virtual reality from many vantage points. The content can be viewed on Oculus VR headsets or with a smartphone. The company has a studio in Los Angeles where artists can produce content.

The first major completely virtual event was Wireless Festival. There were 70 performers in the UK and US over three days and the event was produced by Festival Republic and MelodyVR. There were more than 132,000 viewers of the event from around the world.

MelodyVR has done a deal with promoter Live Nation to produce a series of live performances under the title Live from O2 Academy Brixton. Tickets will be sold via Ticketmaster. This will provide additional income for MelodyVR, which had revenues of £195,000 last year and is heavily loss-making.

MelodyVR is acquiring US-based Rhapsody International Inc, better known as Napster, for $26.3 million - $15 million (£20.5 million - £11.6 million) in cash and 200 million MelodyVR shares. This deal is being funded by a £11.7 million placing at 3.5p a share.

Napster generates subscription revenues and has an international presence. 

The combination of Napster’s music library of 80 million tracks with MelodyVR’s VR content and music events should help the combined group to grow and exploit the increased awareness of music virtual reality content.

DeepMatter Group (LSE: DMTR) has developed technology that helps to improve the repeatability and efficiency of research and development. This helps new compounds for pharmaceutical and chemicals uses reach the market faster. It also enables remote sharing of scientific data.

Much of the research done by scientists is not repeatable and, therefore, does not have much value. DigitalMatter offers a cloud-based service that can reduce the opportunities for error to creep into the process. The business model means that there is potential for significant recurring revenues.

Interim revenues more than doubled to £540,000 and losses reduced from £1.62 million to £1.17 million. This was helped by increased capitalisation of development costs.

Like VR Education, DeepMatter has already spent the bulk of the money it needs to develop the technology. This means that making the relevant people more aware of the qualities of the technology is the next step. Remote working by scientists will have made them understand the need for this technology.

Iomart (LSE: IOM) is one of the beneficiaries of companies’ thinking about accelerating their transformation to digital services. Iomart offers managed hosting, consultancy, business continuity, co-location, security content delivery networks and cloud computing services. It owns its own physical network infrastructure, including data centres.

There is a long-term trend towards greater use of digital services and cloud computing. The lockdown has provided even more focus on these trends with the social move towards remote working.

Recurring revenues are 85% of the total revenues and Covid-19 had minimal impact on the company’s interim results. This year’s pre-tax profit is likely to be flat, although that is due to a higher depreciation charge following recent capital investment. There has also been investment in the sales team. Cash generation is strong and net debt is falling.

In the short-term, winning new business has been tough, but the fundamental changes in the digital market means that demand for Iomart’s services will grow.

Aquis Exchange (LSE: AQS) moved into profit in the first half due to increased stock-market trading volumes. Aquis has a subscription model based on levels of use and revenues were 42% higher in the first half. The business has shown its ability to operate remotely and this will increase confidence in the trading platform.

The market share of pan-European trading has risen from 3.5% in the first half of 2019 to 4.5% in the latest interims. The latest figure is near to 5%.

A collaboration with Derby University will help to improve the company’s machine learning and artificial intelligence technology.

Short-term, Aquis may fall back into loss because of higher costs. The Aquis Stock Exchange was bought in March, but there will be cost savings as the market switches to the company’s technology. 

There could also be delays in decision-making by potential new clients. This is effectively a delay in revenues rather than a loss of business. Longer term, Aquis is set to continue to grow market share.

A more obvious beneficiary of lockdown is remote meetings technology provider LoopUp (LSE: LOOP) and its interim profit was significantly boosted. It may be difficult to repeat this year’s profit next year, but there will still be a higher level of ongoing revenues and profit.

The initial boost in revenues will not be maintained, but revenues will continue to be higher than previously. The second quarter revenues probably grew by two-fifths. That growth is unlikely to continue.

Progressive Research upgraded its forecasts on the back of the bumper trading levels. This year’s revenues were upgraded by 11% to £55.8 million and 2021 revenues were raised 6% to £56 million. To put that in perspective, the 2019 revenues were £42.5 million.

Pre-tax profit is expected to jump from £500,000 to £10.5 million this year and then fall back to £5.9 million next year as costs are increased in order to cope with future growth. Cash generation should ensure a net cash position by the end of 2021.

LoopUp has signed an agreement with Microsoft to sell telephony services to companies using Microsoft Teams, which is already used by most of the company’s clients. LoopUp will benefit from the increasing use of Microsoft Teams.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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